Valuing early stage technologies part five: performing credible due diligence

Mike Pellegrino’s master class in IP valuation, held in Cambridge June 1 and 2, hosted by Management Roundtable, offered as many "do not’s" as it did "do’s." For example, accurately scoping the assignment is paramount. Poor decisions result from the wrong scope. Mike offered a simple example:  your new technology is an adhesive; there are two defined markets for the adhesive, each with distinct characteristics. To value the technology, two separate market studies need to be performed. Of course, one product, two markets, might be manageable.  To properly value the GE brand, in the extreme, an analyst would have to look at thousands of products and consider more than  100 countries!  This would be the equivalent of painting the GW Bridge outside of Manhattan … once you finished, you would have to begin anew.

Once the IP is defined and isolated, and the scope of the project is clear, what constitutes “credible due diligence?”  This is the stage IP Metrics refers to as the IP audit stage … the “evaluation” that is an essential prelude to the valuation.

Who owns the IP? Establishing ownership is a critical step. Is it the inventor’s? The company’s or university’s? Is there any possibility of dilution of IP rights?

Has there been independent counsel review?

Are engineering notebooks available?

Are there existing contracts, and, importantly, have they been duly executed?

Have the parties taken the time to evaluate “design-around” risk? Have the parties researched and considered “design-around” patents?

What is the related patent landscape and what is the infringement detection risk?

Key value factors relate to the willingness and wherewithal of an organization to defend its IP. What is the history of enforcement activities with the organization? What incentives exist to protect … and not to protect? Are measures in place to keep trade secrets confidential? How long will it take a competitor to reverse engineer the “secret?” Who are the potential infringers and do they have deep pockets?

In Mike’s experience, only 17% of the early stage technology valuation research comes down to finance.  The meat resides in sales, marketing, and the science.